causational factors and the investigation of fraud presented by john l. gudavich, ma, cfe president...

Causational Factors and the Investigation of Fraud

Presented by

John L. Gudavich, MA, CFEPresident

J. Lewis & Associates Consulting

What is Meant by “Predication of Fraud?”

Circumstances, Taken as a Whole, that Leads a Reasonable Prudent

Professional to Believe a Fraud is Occurring, or Has

Occurred, or Will Occur

Activities Fundamental to Fraud Prevention?

Create and Maintain a Culture of Honesty &

Integrity

Assess the Risk of Fraud & Develop Concrete

Responses to Minimize Risk & Eliminate

Opportunity

The Negative Affects of Fraud.

How Does an Organization Encourage Dishonesty?

• Poor examples by management

• Quotas or meeting targets

• Rewarding individuals not groups

• Competition among employees

What Expectations Should Management Communicate?

1. Appropriate Values & Ethics

2. Fraud Awareness & Training

3. Consistent Punishment of Violators

Factors Associated with High Levels of Fraud

1. Top management doesn’t care about or pay attention to appropriate behavior

2. Lack of recognition of job performance3. Perceived inequities in the organization4. Autocratic rather than participative

management5. Low organizational loyalty6. Unreasonable budget expectations

Factors Associated with High Levels of Fraud

7. Unrealistically low pay8. Poor training and promotion

opportunities9. High turnover and absenteeism10.Lack of clear organizational

responsibilities11.Poor communication practices within the

organizations

Elimination of Fraud Opportunity

1. Accurately Identify Sources and Measures of Risk through Threat Assessments

2. Implement Appropriate Fraud Prevention & Detection Controls

3. Create a System of Widespread Monitoring by Employees

4. Install Independent Checks, Including an Effective Audit/Investigative Function

Who Detects Most Frauds?

Employees Employees & &

ManagersManagers

NOTNOT Auditors Auditors Detect Detect Most Most

FraudsFrauds

Research Shows…Research Shows…Research Shows…Research Shows…

What Does Sarbanes-Oxley Say about Employees Reporting Fraud?

• It recognizes the value of having a system for employees and others to report wrong doing

• Establish “Fraud, Waste and Abuse Hotlines”

• Section 307 requires a “whistle-blower” system to be in place

• Section 806 prohibits retaliation against “whistle-blowers” or others

The Critical Element Needed To Begin a Fraud Investigation

Management Support and

Approval

Guidelines for Conducting a Fraud Investigation

7 Steps for Conducting a Fraud Investigation

1. Undertake to Establish the Truth of the Matter Under Consideration

2. Don’t Jump to Conclusions - Investigator or Auditor Needs Experience & Objectivity

3. Keep Information to Yourself, Keep Speculation to Yourself

4. Keep Those Who Need to Know Informed

5. Independently Corroborate Information

6. Employ Experts and Consultants if needed

7. Use Investigative Techniques that Are Legally Sound & Fair

8. Report All the Facts Fairly & Objectively- Point to the Guilty & Exonerate the Innocent

7 Steps for Conducting a Fraud Investigation

Evidence

14

3

2Testimonial Evidence

Personal Observation

Physical Evidence

Documentary Evidence

14

3

2

14

3

2Testimonial Evidence

Personal Observation

Physical Evidence

Documentary Evidence

1. Gathered from Individuals, Includes Interviewing, Interrogation & Honesty Tests

2. Gathered from Papers, Computers & Written & Printed Sources

3. Fingerprints, Weapons, Stolen Property Often Involves Forensic Analysis

4. Collected by the Investigator, Includes Invigilation, Surveillance and Covert Operations

Investigative Steps

Gather Testimonial Evidence - Obtained from Individuals through Interviews and Interrogation of:

1. Senior Management Officials

2. Middle Management

3. Employees

4. Expert Witnesses

5. Vendors

6. Customers

Investigative Steps

Gather Documentary Evidence - Business Records, Computer Records from a variety of sources

1. Internal Agency Records

2. Vendor Records

3. Customer Records

Investigative Steps

Obtaining Documentary Evidence

• Use Internal Authority granted by Management• Develop Internal/External Sources • Use Contract Provisions• Criminal Investigation – Use Subpoenas or

obtain Warrants• Civil Investigation – Use Discovery and Civil

Subpoenas

Investigative Steps

Physical Evidence -Fingerprints, Stolen/Damaged Property, Checks, Receipts, Bank Records, Contracts, etc.

1. Evidence can be obtained from internal agency sources or other Business Sources

2. Evidence can be obtained through Civil Procedures

3. Some evidence may need to be obtained by Law Enforcement Professionals

Types of Evidence

• Best Evidence – Known as primary evidence such as original documents, equipment, etc.

• Circumstantial Evidence – Known as Indirect Evidence and based on inference

• Conclusive Evidence – Evidence so strong it overshadows any other evidence to the contrary

• Critical Evidence – Evidence strong enough that its presence could tilt a decision makers mind

Types of Evidence

• Corroborating Evidence – Evidence that differs from, but strengthens or confirms other evidence

• Credible Evidence – Evidence that is worthy of belief; trustworthy evidence

• Demonstrative Evidence – Evidence that one can see and inspect usually offered to clarify testimony. Often termed illustrative, real or tangible evidence

Types of Evidence

• Forensic Evidence – Evidence arrived at by scientific means

• Expert Evidence – Evidence about a scientific, technical or professional issue presented by a qualified expert witness

• Photographic Evidence – Photographs taken by competent authority which can be attested to as being true and unchanged

Report Preparation

• Culmination of all work to prove the fraud and identify those responsible

• Begins with Predication• Identifies “Who, What, When, Where and How of

the Fraud• Identifies “Elements of Proof” to substantiate the

Fraudulent Activity• Attach and List all Evidence to support findings• List locations of evidence that cannot be

attached to the report

Seek Remedial Action

• Administrative Action

• Civil Remedies

• Criminal Prosecution

What Action Do Most Businesses Take After Discovering a Fraud?

1. Pursue No Legal Action

2. Pursue Civil or Administrative Remedies

3. Pursue Criminal Remedies

Fact

More Than 80% of

Organizations Do #1

Organizations Contribute to Fraud

Individuals do it all over again someplace

else.

Employees get the message that you can

get away with fraud without suffering any

penalty.

Termination without Prosecution and Publicity of the Fraud Allows:

Summary

• Be Proactive• Never Disregard the Obvious• Take Action quickly to Stop Fraudulent

Activities• Conduct thorough Audits/Investigations• Don’t limit the scope of your activities• Take Affirmative Action• Publicize the Findings and Action Taken

Investigating Fraud

QUESTIONS?